Discussion Papers

Working Paper ABSTRACTS

 
A Monthly Econometric Model of the Philippines
by Raymund Francis F. Abara
August 2001

 
This paper presents a dynamic simultaneous econometric model.  Using an IS-LM framework this econometric model can be used to forecast key variables such as Output, CPI, interest and exchange rates.  An application to Philippine Monthly Economic Data is presented at the end of the paper that will forecast these variables in the short to medium term.

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Rates of Return on Financial Assets in the Philippines,
1987-2000
by Roy C. Ybañez
July 2001

 
This paper is a major update of an earlier study [Ybañez, 1992] on historical rates of return in Philippine financial markets.  The earlier study covered the period November 1986 to June 1992.  This update extends the series to the year 2000 and shows both before- and after-tax rate of return estimates.  The asset classes covered and the sources of basic data remain the same.

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Stock Market Volatility
by Carlos C. Bautista
April 2001

 
Regime-switching-ARCH regression was used on weekly aggregate Philippine stock return data from February 1987 to October 2000 to estimate its conditional variance.  The estimated volatility was then related to major political/economic events and to fluctuations in economic activity as measured by real GDP growth.  Four high volatility episodes were observed for the period under study.  It was seen that high stock return volatility preceded a bust cycle, defined as a sequence of low growth periods.  The study showed the sensitivity of the Philippine stock market to drastic changes in the political environment as well.  This was observed twice during the late 1980s when a series of military coup attempts led to large fluctuations in the stock price index.  In the 1990s, high return volatility was also observed twice.  The lifting of the remaining foreign exchange and capital account restrictions in 1993 led to the third high volatility episode.  In 1997, the start of the fourth volatility episode preceded the onset of the Asian financial crisis by a few months.

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The Peso Problem:
Theory, Measurement and Philippine Asset Prices
by Rodolfo Q. Aquino
April 2001

 
This paper looks at possible applications of the peso hypothesis in studying Philippine asset pricing behavior.  In particular, some empirical data on the foreign exchange market during the 1997 financial crisis were examined in this context.  The possibility of approaching the study of Philippine equity returns differential over T-Bill returns is also look into. 

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Factors Affecting Career Progress
by Vivien T. Supangco
February 2001

 
This paper shows that the different measures of career success have distinct determinants.  The different definitions of career success entail different dynamics.  However, the human capital variable, work experience, explains number of total promotions and salary.  Another human capital variable, number of organizations worked for, explains years per promotions as well as number of promotions.  Organization size and gender explain number of levels from the company president. 

These findings suggest that strategies for career success should depend on how one defines success.  When success is defined in terms of number of promotions, what seems to be critical are work experience and a fewer organizational transfers.  When success is defined in terms of compensation, work experience appears to be the determining factor.  When success is defined to be the speed with which one is promoted.  When success is defined to be the speed with which one is promoted, one actually benefits from working for fewer organizations.  This implies that one should choose the organization he wants to work for to avoid any costly career mistakes.  When the definition of career success one chooses is the number of levels from the company president, larger organizations entail more steps to climb and hence more time to get to the top.  Gender also affects chances of getting to the top.  Women therefore should look at the culture of the organization and join only those that are not encumbered by traditions or conventions, those that have demonstrated the capacity to believe in women’s worth and in leaving them room to grow.

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Structural Macroeconomic Modeling Exercises
for Corporate Planning
by Carlos C. Bautista
February 2001

This paper presents a simple, easy-to-use structural macroeconomic model designed to generate quarterly forecasts of four key macroeconomic variables – the exchange rate, the interest rate, the inflation rate and the GDP growth rate.  The model’s appeal is the ease by which timely forecast, based on sound economic principles, can be made.  This is important from a corporate planner’s perspective especially when the macroeconomic events heavily influence the direction of a firm’s growth.  The model is estimated by ordinary least squares using quarterly Philippine data from 1981:1 to 2000:3.  Historical simulations, both static and dynamic were conducted to gauge the tracking ability of the model.

The first sample application makes a forecast of the four variables for the year 2001 based on the recently concluded EDSA II and assumptions on other exogenous variables: liquidity follows its trend growth; CPSD/GDP = -4 percent and CA/GDP = 9 percent.  The unprecedented discrete movement of the exchange rate from 54.7 to 47.5 pesos per dollar shifts the end-of-year forecast of 2.3 percent GDP growth to 3.1 percent.  The second example computes for the 2001 growth rate that is compatible with a government deficit of 225 billion pesos.  Growth with this deficit level turns out to be 2.7 percent.  Monte Carlo simulations were conducted so that forecast confidence intervals can be obtained. 

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Communicating to the Consumer Through
Packaging Design
by Ben Paul B. Gutierrez
January 2001

This paper focuses on the communication function rather than the traditional protection function of packaging.  It provides a comprehensive packaging design overview to the design consultant and product manager.  It discusses the package design research tools, classified into ocular and verbal tests, necessary to clearly understand consumer needs and wants.  Consequently, the paper elaborates on the elements of a good package design, explores some design issues, and provides illustrations.

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Factors Affecting Performance in the MBA Program
by Vivien T. Supangco
September 2000

This study looked into the factors that explain variation in the MBA performance as measured by the grade point average upon graduation from the MBA program.  The study used random sampling proportional to size to choose 165 MBA graduates from 1996 to 1999.

The results showed that among the admissions criteria, undergraduate GPA, reading test score (squared), the quantitative test score (squared) were found to be valid in predicting MBA performance.  The higher the undergraduate GPA, reading test score and quantitative test scores the higher the MBA performance.  Logic test score and years of work experience were not found to predict MBA performance.

Two additional qualitative variables explain performance.  These were undergraduate school and program enrolled in.  The study revealed that those who obtained their undergraduate degree from the University of the Philippines performed better in the MBA compared to those who obtained their undergraduate degrees elsewhere.  In addition, students enrolled in the Day Program performed better than those enrolled in the Evening Program.

The results confirm that past academic performance predicts future academic performance.  Context variables also help explain performance in the MBA Program.  Prior academic experience in the same University as well as adequate time to turn in an excellent output or an adequate time to prepare for classes and assignments also explain performance.

This study pointed to the lack of validity of the logic test area of the MBA Admission Test.  Further development of test items in this area is therefore recommended.  In addition, instead of basing the cutoff score on the average of the three test areas, cutoff points must be established for each test area as well as for the undergraduate grade point average.  This is critical in the short run specially when a valid test for the logic area is not yet developed.  This should minimize the chance of being admitted to the program based on a high score in logic when this area did not prove to be valid predictor of MBA performance.

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Outsourcing: An Exploratory Study
by Vivien T. Supangco
August 2000

 
This study looked into the phenomenon of outsourcing.  Specifically, this study sought to determine the reasons why companies resort to outsourcing; the kinds of jobs they usually outsource; the outsourcing related problems they encounter; and the patterns that can be seen in the sample.

This study revealed that the firms in the sample resorted to outsourcing in order to reduce cost and to free themselves from non-core activities to enable them to focus on the activities that are more critical to their firms.  In addition, companies in the sample also engaged in outsourcing to reduce administrative load.

It seems that firms outsource activities that are not among their core activities and those that maybe expensive to provide in-house.  This may result from a volume of output or service that may not be large enough for the firm to enjoy economies of scale.  Among the activities that the sample firms outsource are certain human resource management functions such as recruitment and training.  Janitorial services and maintenance of building and grounds also figure in the top most outsourced jobs.  Sales and distribution are also activities that are being outsourced by some of the sample firms.

There were some problems encountered by the firms that engaged in outsourcing.  The most common problem encountered is poor quality of service or output.  While some firms mentioned cost savings as a benefit from outsourcing, it could actually be more expensive for others.  Thus potential advantages from outsourcing must be weighed against potential problems.

An attempt was made to determine the factors that could explain the variation of outsourcing activities across the sample firms.  However, the variables tested did not come out to be significant in explaining its variation.

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Manufacturing Strategy Among Philippine Companies
by Elvira A. Zamora
July 2000

 
Different competitive choices impose different demands on the manufacturing system.  The relevant question to asks is: What should we be good at in manufacturing in order to enhance our competitive position? The answer to this question defines the key manufacturing tasks of the enterprise: the critical objectives that manufacturing must achieve in order to support the strategy.

The study aims to assess the extent to which Philippine manufacturing companies use manufacturing strategy as a competitive weapon.  Research was done to determine how selected firms use the manufacturing levers (human resources, organization structure and controls, sourcing, production planning and control, process technology, and facilities) to generate manufacturing outputs (cost, quality, performance, delivery time and delivery reliability, flexibility, and innovativeness), and improve manufacturing capability.

Based on a survey of 62 manufacturing companies with factories in and around Metro Manila the study found that there are (1) factors that influence companies to implement programs that would improve manufacturing operations; (2) factors that influence the extent to which such improvement programs are implemented; (3) factors that affect the level of improvement generated by such programs; (4) factors that affect the level of manufacturing capability resulting from such improvements; and (5) factors that determine how much impact manufacturing capability will have on the manufacturing outputs. 

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An Introduction to Data Envelopment Analysis:
A Non-Parametric Approach to Efficiency Analysis
by Raymund Francis R. Abara
June 2000

 
This paper will introduce to readers a non-parametric approach to efficiency called Data Envelopment Analysis (DEA).  After a brief discussion and a few examples of the model, this paper will discuss possible uses of DEA in the local setting.

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Econometric Testing of the Rationality of Investment
Decision-Making in Philippine Listed Firms
by Rodolfo Q. Aquino
April 2000

 
How do Philippine listed firms evaluate investment opportunities? Available survey evidence indicates that most of the firms sampled claimed that they employ modern quantitative techniques that are based on maximizing shareholders’ wealth.  This paper set out to verify if this claim could find support in the statistical data examined in this study.

Tobin’s q, defined as the ratio of the market value of outstanding shares of firms to replacement cost of their net assets, was used to test the hypothesis that firms do employ the criterion of shareholders’ wealth maximization when they evaluate investment proposals.  The idea is that values of q greater than one, on the margin, should stimulate more investments and values less than one correspondingly should discourage investments until q equals unity.  The study found no evidence to support such a hypothesis.

Instead, the study found statistical evidence that consistent revenue growth stimulates greater investments presumably due to the increased business confidence that revenue growth generates.  On the other hand, limitations on access to funds, either through the equity market or the loans market, dampens investments.  The significant negative influence of high fixed asses to total assets ratio also indicates that irreversibility of physical investments once made and the setup and adjustment costs related to high fixed capital expenditures may put some restraint on investments.

Finally, there appears to be no empirical basis to the often-cited claim that the strength of the local stock market is a solid barometer of investor confidence.  High measures of marginal q do not seem to translate into actual investments of capital in the aggregate economy.

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Review of Mathematical Brand Choice Models
by Ben Paul B. Gutierrez
October 1999

 
This paper provides a comprehensive review of mathematical brand choice models.  The survey covers a trichotomy of models: multidimensional scaling, conjoint analysis, and multi-attribute choice modeling.  The logic structures, assumptions, and purposes of each approach are discussed to describe situations where each choice model would be appropriate.  Finally, the gap between theory and practice is highlighted to identify direction for future research.

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Capital Market Integration in the Asia-Pacific Region:
Focus on Real Interest Rates and Real Exchange Rates
by Maria Teresa P. Jurado
October 1999

 
This paper attempts to determine whether or not there is capital market integration among the Asia-Pacific countries, and between the region and the rest of the world.  The paper analyzes the co-movements of the countries’ real interest rates and real exchange rates, as well as the co-movement between the real interest rates of the Asia-Pacific countries and that of the developed western world, as represented by the London Interbank Offered Rate (LIBOR), which is the rate on six-month deposits in U.S. dollars in London.  The study proceeds by first testing for unit roots in the variables to identify the countries with non-stationary rates, a characteristic that is required for cointegration techniques to be meaningful.  The study reveals a few isolated cases of pair-wise integration between Asia-Pacific countries, as well as integration with the international market for Korea, Malaysia and Sri Lanka.  A generalization, however, tends towards the lack of capital markets integration in the Asia-Pacific region. 

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An Assessment of Market Saturation in the
Retail Trade Industry
by Epictetus E. Patalinghug
August 1999

 
Retail trade business has recently grown at a rate that keeps pace with the economy’s growth rate.  Retailers have increasingly grown into some of the largest domestic companies and have diversified into real estate, banking, and manufacturing.  Innovation has likewise invaded the industry.  The use of information technology (e.g. electronic check-out systems and point-of-sales systems) and the introduction of professional management have transformed the industry into a dynamic and important segment of the services sector.  The growing importance of the retail trade to the Philippine economy has dramatized the need to re-examine the relevance of the Retail Trade Nationalization Act, which restricts investments in retail trade to Filipino nationals.

The policy thrust of the Philippine government with regard to retail trade in the past four decades was to protect local retailers.  To the extent that this policy thrust limits competition in the sector, it complicates its goal of promoting consumer welfare.  More recently, however, plans of opening up the retail trade sector to foreign investments have been made. 
 
A discussion of the various methodologies in evaluating market attractiveness is made.  From the discussion, a methodology was chosen to measure market saturation levels in the Philippine retail trade industry.

Retail saturation rats are shown to have increased from 1988 to 1994 because the growth of the capacity to retail exceeded the growth of the ability to buy in most regions.  Overall, the national rate of retail saturation increased from 37.82% in 1988 to 58.12% in 1994.

While government-generated data on retail sales at the firm level indicated relatively low rates of return on sales, an analysis of market attractiveness of ret ail trade at the regional level indicated that the growth of the capacity to retail exceeded the growth of the ability to buy in most regions from 1988 to 1994.  In brief, retail saturation was growing, but it was not yet a major problem in the Philippine retail trade industry.  Thus, the Philippine retail trade industry still offered market opportunities for new entrants or for existing players wanting to expand store facilities. 

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Regime Switching and Boom-Bust Cycles in a
Less Developed Economy
by Carlos C. Bautista
March 1999

This study demonstrates the power of Markov regime-switching techniques of Hamilton (1989, 1994) in modeling economic fluctuations in a less developed economy.  The model adopted is able to account for the nonlinearities produced as a result of a drastic change in the economic environment in the Philippines.  The model isolates the drastic regime change brought about by the 1983 crisis as the third state.  The two other states represent the boom and the bust periods that have characterized the growth path of the Philippine economy since its early stages of development.  Annual (1948-1998) as well as quarterly data (1981:1-1998:4) on real GDP are used.  For the annual model, the length of the boom-bust cycle is approximately 7.7 years.  For the quarterly model, which excludes the pre-1983 crisis period, the length is 4.25 years.  The change in cycle length is explained as evidence of the effects of the 1983 crisis. 

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Inflation Risk and Interest Rates in a
Less Developed Economy
by Carlos C. Bautista
March 1999

This study makes use of the consumption-based capital asset-pricing model as a framework in empirically analyzing the role of inflation risk and uncertainty in the determination of interest rates.  Using quarterly Philippine data from 1981 to 1997, the study shows that inflation covariance risk exerts some influence over the movement of interest rates.

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Price-Earnings Ratio and Stock Returns in the
Philippine Stock Market
by Lina J. Valcarcel
August 1998

 
The study looks at the relationship between stock return and price/earnings ratio.  Previous studies in the US found that stocks with low P/E ratio usually exhibit higher returns than stocks with high P/E ratio.

The researcher examined the behavior of stocks in the Philippine stock market to see whether the same phenomenon exists.  Ninety companies listed in the Philippine Stock Exchange (PSE) were used as sample.  These firms must have been traded at the PSE from 1992-1995.  Stocks were divided into nine portfolios of ten stocks each from the lowest P/E ratio to the highest and their corresponding stock returns calculated.  Then those stocks with the highest returns and those with the lowest returns were tabulated to identify the groups from which they came.  Contrary to expectations, the study showed that stock which earned the highest returns did not come from those with low P/E ratios.  Those which exhibited highest returns came from portfolios 5 and 6.  On an individual basis, however, good performers (those which exhibited higher returns) could be found anywhere but the portfolios of stocks which exhibited highest returns came from Groups 5 & 6.

One reason for the above phenomenon maybe the behavior of the Philippine stock market.  While the P/E ratio is a yardstick for established markets like the US, this is not so for emerging markets like the Philippines.  Investors in these emerging markets are buying into growth opportunities and are willing to pay for high P/E ratios if the company has a good potential for growth.

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Capital Budgeting Practices in the Asia-Pacific Region:
Australia, Hong Kong, Indonesia, Malaysia,
Philippines and Singapore
by George W. Kester, Rosita P. Chang, Erlinda S. Echanis et al.
April 1998

 
This paper reports the results of surveys of executives of firms in six countries in the Asia-Pacific region – Australia, Hong Kong, Indonesia, Malaysia, the Philippines, and Singapore – regarding their firm’s capital budgeting practices.  The survey questionnaires included such topics as capital budgeting decision rules, risk analysis, discount rates, cost of equity capital, and capital rationing.  These surveys are part of a continuing research effort to assess the views of executives of countries of the region regarding issues related to corporate financial policy.

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Test of the C-CAPM for the Philippines: 1983-1997
by Carlos C. Bautista
January 1998

 
This paper presents an initial test of multi-period asset pricing models using quarterly Philippine data.  Using a consumption-based asset-pricing model, the study finds the rate of time preference to be 5.53 percent (on an annual basis).  The estimated risk aversion coefficient of 0.058 seems to be on the low side when compared with estimates for other countries.  Hansen’s J-test finds favorable evidence for the C-CAPM as the overidentifying restrictions are not rejected.

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Capital Inflows in a General Equilibrium Setting
by Carlos C. Bautista
November 1997

A computable general equilibrium (CGE) model is constructed to examine the effects of capital inflows on the sectors of the Philippine economy.  The CGE model has five production sectors, two households and two primary inputs.  Under a flexible exchange rate regime, it is shown that capital inflows lead to an appreciation of the domestic currency.  Nontradables output increases while those of the tradables goods sectors decline – a demonstration of the Dutch Disease effect. 

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Technological Innovation in the Philippine
Advertising Industry
by Elvira A. Zamora & Eloisa H. Lingan
October 1997

 
This study was conducted in order to determine how technology for the production of television advertisements is adopted in the Philippine advertising industry.  An analysis of the industry structure showed that digital technology acquisition and adoption are more the concerns of commercial production and post-production houses than of advertising agencies, which subcontract most of the work to these advertising suppliers.  A test of two technology adoption models also showed that the psychographic model, more than the benefit-cost model, better reflected the decision making process involved in the acquisition and adoption of digital technology.  Perceived risk and perceived importance of the new technology are the primary considerations, while factors such as price and effect on quality and productivity appear to play a secondary role.

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